Federal Reserve Balance Sheet Set to Explode

Picture a dam with flood waters pouring in behind it. The dam may be expressed, at present, as the unwillingness of lenders to lend and borrowers to borrow and spenders to spend. The Fed has a name for that dam: velocity of money, or the “money multiplier.”

This is the rate at which money circulates in the economy. In normal times that multiplier is about 1.5. It dropped precipitously at the start of the Great Recession to about 0.7 and has, until recently, stayed there as investors, savers, and business owners hunkered down and began paying off their debts rather than spending as they had previously.

But the dam, to extend the analogy, is beginning to give way. As this is being written, the multiplier has moved smartly higher in the last few months, and is now approaching 0.9.

The consequent impact on “real” money, according to Durden, is highly predictable: Once the dam gives way, and velocity returns to historic levels, gold will be selling at $3,350 an ounce. And paper money will continue its descent to its intrinsic value.